Q4 2020 Under Armour Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the under Armour, Inc. Fourth quarter earnings webcast and conference call. At this time all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session.
Ask a question during the session do you want and need to press star one on your telephone. Please be advised that today's conference is being recorded.
If you require any further assistance. Please press star zero and I would now like to hand of competencies to speak of today landfill acre SVP Investor Relations and corporate development. Please go ahead to.
Thank you good morning to everyone joining us for under armour is fourth quarter and year end 2020 earnings conference call. The information made available today includes forward looking statements that reflect a number as view of its current business as of February 10th 2021, and considerations for future events that may impact our business moving forward statement.
Statements made today are subject to risks and uncertainties that are detailed in to documents regularly filed with the SEC and the safe Harbor statement included in this morning's press release, both of which can be found on our website at about at under armour Dot com.
It is important to note that due to ongoing uncertainty related to COVID-19, with respect to the duration and extent of the virus is immediate and long term impact on the global retail environment. We continue to expect the possibility of material impacts on our business results Accordingly, future results could differ meaningfully from historical practices and results or current descriptions estimates and.
Suggestions.
On today's call, we may reference non-GAAP financial information, including adjusted and currency neutral terms, which are defined under SEC rules and this morning's press release.
You May also hear us refer to amounts under U S. GAAP reconciliations of GAAP to non-GAAP measures can also be found in our press release, which identify and quantify all excluded items and provides our view about why we believe this information is useful to investors.
Joining us on today's call will be under armour, President and CEO, Patrik Frisk and CFO, Dave Bergman. Following our prepared remarks, we will open the call for questions with that I'll turn it over to Victor.
Thank you Lance and good morning, everyone and welcome to our fourth quarter and year end 2020 conference call.
Before we start I'd be remiss not to point out what a fantastic past weekend. This was for sport and for under armour for.
Stefan current scoring and 57 points to eight time, he's score of more than 50 and of game to Chase you are and winning the NFL defensive rookie of the year and Joel and be putting up 33% to keep to 76% first place to Jordan and speed posting of career best 10, birdies and around there was no shortage of UA highlights this weekend.
And of course, Theres, one more highlight or better yet make that the seventh at.
And number seven for the goat quarterback Tom Brady.
You're allowed to Tampa Bay Buccaneers to the second average Super Bowl victory.
Tom it's quite easy to run out of ways to describe yet again, another incredible accomplishment and he's added to this unparalleled career.
And his 10 years as an under armour athletes, Tom I think simplify what perseverance and hard work and leadership can do and pursuit of excellence on behalf of the entire under armour family, Tom. Thank you for making us better.
Now turning back to our results and.
As I reflect on my first year of C. O met at global pandemic debt has tested all of US I'd start by underscoring just how incredibly proud I am of our team's resilience and their ability to execute at an incredibly high level against our long term strategy. We've made significant progress on our way to becoming a stronger brand and a better run company.
For the past year for managing through at three months global retail shut down and re launching on North America and E Commerce platform to executing a comprehensive restructuring effort and divesting to my fitness Pal platform of.
Our mantra the only way is true turned out to be even more for telling that perhaps we had intended it to be.
Despite an incredible amount of uncertainty and 2020, we stay the course by harnessing the strength of our re architect of go to market engine to deliver performance based products and experiences along with targeted data driven storytelling under armour showed up stronger and more holistically as a brand and in years past.
From an operations perspective increasingly more effective supply and demand planning along with our best in class distribution network enabled us to quickly adapt to the needs of our customers and consumers with greater precision and efficiency getting the right product to the right place at the right time.
As we close out 2020, our efforts over the past couple of years to pursue a clearly defined target consumer rebase, our cost structure and fundamentally change the way. We work is beginning to yield results and.
Empowered by a clear identity of who we are at leading athletic performance brand. Our foundation is solid our disciplined tested and proven and the opportunity before us is robust.
As I look ahead, I'm energized by our transformation and I'm confident that our operating model and strengthening our ability to drive sustainable returns to our shareholders over the long term.
We remain confronted with uncertainty due to the COVID-19 pandemic as a result, some parts of our business have fundamentally changed including new ways of working and interacting with our consumers customers and teammates.
These changes ultimately play out over the next few years remains to be seen.
And I'm confident that we are significantly better equipped to navigate through the changes given our improved levels of agility and optionality.
The last year has also brought about meaningful changes in consumer behavior and related marketplace demand impact and disrespect, we remain focused on controlling what we can while staying prudent.
This means being patient and measure it and how we manage our business and conscious about where we are within our journey, while maintaining the same level of discipline that got us here.
To this effect, we will continue to constrained demand in 2021 of decision that as discussed in previous calls may impact our ability to drive top line volume and the near term. However for the through proactive wholesale door reduction efforts and North America were ordering slightly less product against future demand based on the brand and.
And margin benefits that we realized in 2020, we are confident that this focus will help elevate our premium positioning with consumers and therefore driving better profitability.
Carrying forward into 'twenty and 'twenty. One there are for areas of focus that we laid out on our last call first is continuing to strengthen the brand and through increased engagement and consideration with the focus performer second is continuous improvement within our operating model to drive even greater efficiency across all end to end processes.
Third is elevating of D to C focused approach to deepen and amplify our most intimate connection with under armour consumers and finally, as we get back to profitable growth and 2021, making sure of discipline stays aligned with driving shareholder value over the long term.
Starting with brand strength and engagement.
At a year ago, we launched a powerful global on drama voice to drive increased consideration with our current consumer to focused performer.
And powered by enhanced tools and real time metrics as consumer behavior has shifted towards E commerce as well as working out from home, including a large shift towards running we to alter the course from the only way is through to through this together and other variations along the way we refocused our efforts more surgically to drive greater return.
Submit and exceedingly dynamic environment.
And one of these efforts of course take time to manifest and to see change exiting of year like 2020 with increased consideration conversion and higher selling prices in many parts of our business gives us greater confidence and our strategy and execution for the year ahead.
Successful storytelling of of course needs to partner with great products in 2020, we stuck to our playbook and lean heavier into brand and product marketing to support successful introductions like our project for our collection Iridium Pant Infinity brawl, UA sports mask, and and footwear hover Mackinac fathomed to and the breakthrough.
And one highlight we're especially encouraged by the continued momentum and our women's business, specifically broth and bottoms and broad based interest across our run category led by our innovation driven hover franchise.
Another highlight is the launch of the Curry brand and December as a purpose led collaborations powered by under armour were at.
Excited to partner with Stefan to delivered performance products that along with focused partnerships will help fund youth sports and under resource communities through equitable access and safe places to play.
As of Pinnacle expression of this effort, we launched to create basketball shoe the first product to feature of UA flow at.
The second footwear at Cushioning technology released under our re engineered to go to market flows proprietary and non Robert of sold has manifested into our most of BD and highest traction footwear yet.
Up next your flow is set to launch and one of our largest long term growth opportunities running built.
Building on the success and momentum of hover the UA flow running platform will help us accomplish two things as and innovation. We believe this products performance attributes, including its unique traction ride and energy return structure will help drive even more significant consideration and authenticity with core runners and second at.
Our most pinnacle running footwear offering and will broaden our ability to segment and help differentiate our assortment and thereby creating opportunities for shelf space expansion within running specialty and key wholesale accounts.
Switching gears to our second area of focus is our operating model evolution throughout 2020, we worked to Rebase our cost structure to ensure we are positioned from a strategic operational and financial perspective, with an appropriate foundation and agility to scale with future growth.
And within our comprehensive restructuring plan, we believe our central purpose continues to put us and are positioned to return to double digit operating margin over the long term.
And this spirit, we've been asked many times if we have reached an optimal cost structure for <unk> or where our general breakeven ratio of life.
At $2 2 billion of SG&A in 2020, our cost structure is not meant to support that for 5 billion of revenue that we realized last year, but instead of larger top line business, where we can begin to leverage some of the foundational investments necessary for our growth expectations.
And as laid out and this mornings press release and details of that Dave will discuss later, we plan to return to profitability in 2021, and therefore, our breakeven is somewhere around the $4 7 billion Mark.
With our cost structure and now appropriately rebased. It is important to understand a few elements of how we're thinking about SG&A expenses and investments moving forward.
When considering our restructuring efforts and how they have impacted and will continue to affect our overall cost structure. It is essential to remember that most of these efforts have been related to future cost avoidance versus current cost reductions that said, we had realized underlying SG&A benefits and certain areas. However, it's not as simple.
And as cutting cost to gain leverage as we mentioned early within our restructuring efforts. Our main objective was to unburden ourselves of decisions and commitments made when we expect it to be of much larger company than we are now.
Within those scenarios there was also and expected level of productivity that was never realized.
As a business and pursuit of brand right growth, we will continue to invest and driving that growth and for us specifically that means marketing at <unk>.
And elevating our international and D to C footprints more simply put while the absolute SG&A dollars may not change much in the near term I'd underscore that productivity and return on the investments that we're making are appropriately greater than just a few years ago and should market factors impact our growth track in the near term.
We're now also capable of flexing and managing our costs with greater discipline, and optionality to maintain and more consistent profitability trajectory.
These factors along with improved visibility and tighter alignment of our demand and supply planning functions have afforded us greater flexibility with our customers and our ability to service higher than planned to Mt.
This is especially evident and our year end inventory position.
<unk> was at the same level that we ended 2019.
In 2021, we plan to manage this even more tightly helping us drive full price selling across all distribution points, while keeping an eye on increasing our productivity and therefore turns.
Moving to our third priority elevating of D to C focused approach and the pandemic has certainly magnified and accelerated digital and adoption rates worldwide.
With E commerce up, 40% and 2020 and representing nearly half of our total D to C business for the full year. We are hyper focused on better understanding the consumer journey and building greater personalization capabilities to unlock even deeper connections with athletes.
And our retail stores, we are working to evolve concepts to drive more profitable formats, particularly for a full priced brand house locations. Our factory house business, it's about driving greater productivity in store, reducing our promotional levels and leveraging the fleet to clear through excess product. While at this foundational work continues to help us and our journey to be at.
Best in class retailer with the acceleration of E commerce and tightening of wholesale this truly becomes and omnichannel conversation.
Whether its drop ship endless aisle, where RFID, we believe executing a powerful omni channel strategy will enable us to create a more seamless and connected shopping experience across all consumer touch points and finally being in a position both strategically and operationally to pursue this channel agnostic approach is something that we bill.
<unk> will serve as a key unlock to strengthening our brand ecosystem wherever and whenever consumers choose to engage under armour.
Bringing all of these strategies together leads us to our last priority, maintaining our discipline around profitability to drive sustainable shareholder value over the long term.
And from operating model refinements, our innovation pipeline and brand elevating strategies to our tighter inventory management and of Rebased cost structure, it's well understood across the enterprise, what we must do as we work to deliver greater leverage and sustainable profitable growth over the long term.
So to wrap up I'm proud of what under armour has accomplished and the last year, particularly our ability to efficiently navigate and incredible amount of marketplace place variability, while continuing to advance our transformation.
Building on this demonstrated proficiency as we move into 'twenty and 'twenty one amid uncertainty that has carried over from last year I am confident about our ability to meet near term challenges accomplish our goals and balance of them with our long term objectives and with that I'll hand, it over to Dave.
Thanks, Patrick.
And the fourth quarter and for the full year, we delivered stronger than expected results of performance to be proud of especially during our global business environment that faced significant macro and micro challenges.
Over the past few years.
The work, we've accomplished created of space and optionality necessary to work through these challenging conditions.
From industry, leading product innovations to connecting consumers through fantastic brand stories and improved shopping experiences to.
To deliberate decisions to ensure liquidity.
Along with executing the divestiture of my fitness Pal I am pleased with the way we closed out 2020.
With that said, let's dive and our fourth quarter results starting with revenue.
Which was down 3% to $1 4 billion compared to the prior year.
This was better than we had expected due to higher than anticipated demand across our wholesale and DTC businesses.
From a channel perspective, our wholesale revenue was down 12% keep in mind about $130 million and orders shifted out of the fourth quarter into the first quarter of 2021 due to timing impacts from COVID-19 related to customer order flow and changes and supply chain timing that we discussed on our last call.
<unk> to our plan, we experienced stronger sell through and higher demand from our customers.
Our direct to consumer business increased 11% driven by 25% growth and our E Commerce business.
And relative to our plan, we experienced better than expected traffic trends and our retail business.
Our licensing business was down 12% driven primarily by lapping onetime settlements and the prior year with two of our North American partners at.
And lower minimum royalty payments.
This result was better than expected driven primarily by our Japanese partner.
By product type.
Apparel revenue was down 4% driven by declines and our train and team sports categories.
Footwear was down 7%, mainly driven by declines and our team sports category and.
And finally, our accessories business was up 32% with all of the growth being driven by sports masks.
From a regional and segment perspective.
Fourth quarter revenue in North America was down 6% negatively impacted by the COVID-19 timing impacts I previously mentioned as well as reduced off price sales.
These headwinds were partially offset by strength in E commerce within our DTC business in the quarter.
In EMEA revenue was down 11% of.
Also negatively impacted by COVID-19, timing impacts, partially offset by solid growth within our DTC business, primarily due to E commerce.
Revenue in Asia Pacific was up 26% driven by growth across all channels, partially offset by timing impacts from COVID-19.
In Latin America revenue was up 2% driven by DTC growth, which included strength and our E commerce business, partially offset by impacts from COVID-19.
And finally, our connected fitness business was down 5% due to the sale of the my fitness Pal platform in the quarter, which was completed in mid December.
It is important to note to <unk>.
Following this sale, we will no longer be reporting the connected fitness segment.
Starting with the first quarter of 2021, the remaining <unk> business will be consolidated within our corporate and other segment.
Fourth quarter gross margin increased 210 basis points to 49, 4%, including a $12 million impact related to restructuring efforts.
Excluding restructuring charges adjusted gross margin increased 300 basis points to 53% drill.
Driven by approximately 150 basis points of positive channel mix benefiting from lower year over year distributor and off price sales, which carry a lower gross margin and a heavier mix towards DTC, which included strong E commerce growth.
Additional year over year increases included 90 basis points of supply chain benefits, primarily driven by product costing improvements and.
And 30 basis points of positive regional mix, driven by APAC growth and the quarter.
Relative to our previous expectations for gross margin and the fourth quarter. Our results were significantly better than expected as we experienced higher than anticipated demand, which allowed us to sell in and sell through with considerably less discounting and markdowns than we had initially anticipated.
SG&A expense decreased 4% to $586 million due to our restructuring efforts and tighter spend management.
And the fourth quarter, we recorded $52 million of restructuring charges and certain impairments related to long lived assets.
As a reminder, we expect to incur a total estimated pretax restructuring and related charges under this plan and the range of $550 million to $600 million.
For the full year, we realized $473 million and restructuring and related impairment charges.
And $141 million from impairments of long lived assets and goodwill.
We expect to complete our restructuring charges within the first half of 2021 with most of the remaining charges coming in the first quarter.
Our fourth quarter operating income was $56 million <unk>.
Excluding restructuring and impairment charges adjusted operating income was $120 million.
After tax we realized net income of $184 million or <unk> 40 of diluted earnings per share during the quarter.
Excluding restructuring charges as well as the noncash amortization of debt discount on our senior convertible notes and the game and deal related costs associated with the sale of my fitness Pal.
Our adjusted net income was $55 million for 12 of adjusted diluted earnings per share for the quarter.
From a balance sheet perspective, I am pleased to report we ended the fourth quarter with $1 5 billion and cash and cash equivalents inclusive of $199 million related to the sale of my fitness Pal.
We also had no borrowings outstanding under our $1 $1 billion revolver.
And finally inventory for the fourth quarter was 896 million relatively unchanged compared to the prior year.
Concerning our 2021 outlook, while recent consumer trends have been more positive than we anticipated we remain cautious and planning our business given the continued uncertainties with respect to demand and the overall marketplace due to the COVID-19 pandemic.
And therefore the outlook, we're providing today is predicated on our business continuing and the near term with the same general macros that we've seen most recently followed by moderate improvements within the greater retail landscape as the year progresses.
And we're assuming no major retail or other business shutdowns or other new significant adverse economic impacts due to COVID-19.
That said I will provide some high level color on how we're thinking about our business for 2021.
Relative to revenue, we expect a high single digit rate increase for the full year compared to 2020, reflecting a high single digit increase and North America, and a high teens growth rate and our international business.
Looking at 2021 some of the things included within our outlook that we anticipate will serve as revenue had been headwinds include the following.
First would be the absence of my fitness Pal.
Second to Patrick's earlier point about maintaining our current supply and demand planning and inventory management discipline, we plan to constrain orders against expected demand.
Third as previously discussed we will begin to exit certain undifferentiated wholesale distribution, primarily in North America, starting in the back half of 2021 with a plan to close about two to 3000 wholesale partner doors, thereby expecting to land closer to 10000 doors by the end of 2020 to.
And finally, we're making several changes to our operating model and Latin America, including shifting certain countries to strategic distributor ship models.
Which will negatively impact revenue, but should help improve operating margins.
From a channel perspective within wholesale it is important to keep in mind that we are just now finalizing our third quarter bookings and have only recently started to take orders for the fourth quarter.
Therefore, we have limited visibility into the back half of the year.
And as Patrick mentioned, we will look to manage our inventory tightly and in some instances constrained demand to continue to return to more premium revenue growth.
All of this means we are taking a prudent approach to forecasting and managing our business. This year.
From a DTC perspective, we expect retail to outpaced E commerce growth as our digital business is up against strong comps from 2020.
For gross margin on a GAAP basis, we expect to full year rate to be up slightly against our 2020 adjusted gross margin of 48, 6%.
Benefits from pricing and supply chain efficiency being largely offset by the sale of my fitness Pal, which was a high gross margin business.
From an SG&A perspective, as Patrick detailed we believe we of appropriately rebased our cost structure at.
And we believe the improved discipline and processes. We currently have in place have instilled a more return based approach to our investments that should drive greater prioritization and to the areas that deliver the highest return and support our long term growth opportunities.
However, critical areas like DTC International and marketing will require us to continue investments to support our growth expectations.
Therefore, we are planning on slight SG&A growth for the year.
With all of that considered we expect reported operating income to reach approximately $5 million to $25 million and adjusted operating income to be approximately $130 million to $150 million.
Which will take us to our reported diluted loss per share of about 18 to 20.
Or adjusted diluted earnings per share and the range of 12 to 14.
Now to provide a little bit more color on the first quarter of 2021.
We are currently planning for first quarter revenue to be up approximately 20%.
This expectation includes about $130 million of orders that shifted out of the fourth quarter of 2020 into the first quarter of 2021 due to timing impacts from COVID-19 related to customer order flow and changes and supply chain timing that we discussed earlier.
Next we expect gross margin to be up about 180 to 200 basis points compared to the prior year, driven primarily by pricing benefits related to lower promotions, primarily and DTC compared to the prior year end.
And continued supply chain benefits related to product costing improvements.
We expect these benefits will be partially offset by the absence of my fitness Pal.
Bringing this to the bottom line, we expect a first quarter operating loss of approximately $55 million to $70 million excluding.
Excluding planned restructuring impacts we expect adjusted operating income to be approximately $30 million to $35 million.
Excluding restructuring, we expect about <unk> <unk> of adjusted diluted earnings per share.
And finally before moving to Q&A. We also announced this morning, our plan to change under armour fiscal year end from December 31 to March 31 of each year.
This will become effective on April one 2020 to.
Based on our revenue being more heavily weighted and the second half of the calendar year. We believe this change, namely putting those two quarters and the middle of our new fiscal year will provide us with greater visibility and subsequent forecast accuracy as it relates to strategic business decisions.
And providing our initial annual outlook.
Mechanically nothing changes this year for fiscal 2021 net.
And next year and 2020 to we will have a three month or one quarter transition period that runs January one through March 31.
Which we'd expect to report in May and like our current first quarter cadence.
Following that transition period, our fiscal 2023, we'll begin April one of 2020 to and run through March 31 of 2023.
Accordingly, there will be no full year fiscal 2020 to reporting.
In closing, we have made great progress against our transformational journey, which afforded us increased agility and flexibility to navigate through what was undoubtedly an unprecedented year.
We've reengineered our go to market.
Optimized our product and innovation engines and focused on our well defined target consumer. Additionally.
Additionally, the continued actions we took this year to protect and strengthen our balance sheet drove significant improvements and our ability to generate cash and protect liquidity.
Moving forward our approach remains appropriately cautious given the high level of uncertainty related to COVID-19.
That said, we will maintain our disciplined approach and executing our strategies and continue to put under armour and the best position possible to achieve sustainable profitable growth over the long term.
With that I will turn it back to the operator for your questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone to it.
Jay Your question touched upon key please standby will be comparable to Q&A Ross day.
Our first question comes from Jim Duffy with Stifel. Your line is now open.
Thank you and good morning, I Hope you guys are all doing well great progress with the business, Dave I wanted to dig and some on the SG&A SG&A pencils to low single digit growth, which implies a leverage on the revenue growth for 'twenty and 'twenty you'd talked about $40 million to $60 million and savings from the restructuring with more to come and 21.
Much more savings from the restructuring will build on this in 2021, and then can you talk about how SG&A splits for the year, where do you see marketing expense for the year are you expecting deleverage there and where.
Or do you see operating overhead.
Yeah, Jim we've obviously been putting a lot of work into this area over the years in our cost structure is.
Is built for a larger business and it will take driving greater revenue to return to that kind of double digit operating margins, but.
As we drive higher revenue and areas like marketing and retail we should be able to leverage the cost of these areas more efficiently and win.
And to win going forward from a productivity perspective.
As we mentioned there are some key areas, we've got to keep investing and like DTC international and marketing, but the discipline and processes that we now have in place are going to help us kind of better manage our SG&A growth relative to revenue and making sure that we're continuing to leverage going forward.
I would say that based on the timing of execution of our restructuring activities 2020 and into early 'twenty one.
And we talked about of benefit of about $40 million to $60 million on operating income in 2020, you can assume that that benefit is going to at least double when you think about what's in the 2021 numbers, but again, we are reinvesting some of that especially and the marketing front.
And so this year, we're not we're not giving an exact percentage of marketing.
But we are going to stay at a pretty healthy investment area as a percentage of our revenue.
I would say it might not be as high as as in 2020.
But it's probably going to be a higher percentage than it was potentially and 19 of prior as we continue to want to invest and really grow the brand and keep that momentum going.
So that's what we're seeing and we look forward to seeing the continued leverage as we drive into 'twenty two as well.
And David.
You've done a lot of hard work on eliminating fixed costs, you talked about the capacity to flex can you give a few examples of changes and the cost structure that gives you that enhanced flexibility.
Yes, I mean, a couple of things I would say is that from a.
From a people cost perspective, we are definitely rebased now and that gives us a lot more flexibility going forward.
In addition from a marketing perspective, we've really gone deep there relative to trying to.
Alleviate and get out of some of the longer term contracts that we werent receiving much of the benefit there and that allows us to have kind of a bigger war chest to be nimble on of marketing front going forward and making sure we're deploying that marketing and the areas of highest return based on our ROMI work that we've been doing.
And some other areas that have really benefited like even depreciation is now becoming more of a tailwind for us, whereas it used to be of headwind based on the high capex levels back in 16, 17, and 18, but our investment committee has worked diligently to really prioritize our capex spending and now we're seeing it.
Depreciation and slowing down considerably which has been nice as well. So there's a lot of other areas that we've been addressing around <unk> and other areas of spend.
But we are instilling the right discipline now benchmarking metrics to make sure that we're investing and the right places going forward and keeping it under control and leveraging as we go into 'twenty two.
Thank you so much guys.
Thanks, Jim.
Thank you and next question comes from Paul Trussell with Deutsche Bank. Your line is now open.
Good morning, and congrats on the strong execution.
First maybe can you provide an updated view of.
And how under armour is positioned and the North American wholesale market, specifically can you provide more color on that or quantify even the impact of the supply limitations and reduce door count to.
Revenues, where you are.
From the off price channel inventory position and then Conversely, maybe also speak to the positive on what Youre seeing in terms of brand momentum and full price sales.
Hi, Paul this is patrik.
As it relates to the efforts that we're doing overall to what we call constrained demand and asset as part of that the pullback that we're doing and some undifferentiated doors in North America that really gets underway in 2021 and predominantly in the back half of the year.
And as we've been wanting to be fair.
Fair to.
Customers and allow them to adjust to to our actions.
So that will be a two to three year journey for us where we get out of two to 3000 doors and <unk>.
Starting in the back half of this year and what will have to be left with when where and when we're through that journey is really what we believe or.
And more appropriate.
Doors for us.
And with doors that we feel are going to win and other other ways win with the winners kind of mentality there.
And where we also feel that we can earn shelf space back.
And so that's really important for us. It's also important for our segmentation and our merchandising strategy going forward. So those things will all help.
To make sure that we're building toward a more premium position and in combination with that I spoke about it and my script in terms of the effort that we're putting into our own direct to consumer as well and becoming a better E commerce.
And full price brick brick and mortar as well as and enhanced positioning and our and our outlet at going forward here in North America and.
All of that together is going to elevate the brand and we're also already seeing some of that happen and to some respect and in terms of what we talked about as it relates to more full price selling and but it's a journey and.
And it happens over time step by step and.
And we initiated this already last year and we will continue to do so as we go into the future and.
Paul This is Dave I would also add you mentioned kind of on the third party off price channel.
And that's one where we've definitely been working at down steadily over the past couple of years, which we're proud of and we've kind of land and on that.
For 2020, and we landed at about a 4% mix of our total business there.
And we've got a lot tighter discipline now and how we manage and order of our inventory.
So for 2021, we believe we can probably improve that maybe a little bit more from a mix perspective, but it should no longer be a revenue headwind for us. So we're excited about where we are there to.
Thank you for that color and then.
To follow up just gross margins were impressive Inc.
For Q, maybe just talk through the drivers of the improvement of at this past period and just the puts and takes that we should keep in mind that leads to your kind of slight expansion this year.
Yes, I mean Q for a big part of it was channel mix, because we had lower mix of business within our distributor.
And markets and also lower percentage of third party off price sales, but then also we had a much higher DTC mix versus Q4 of of 2019. So.
That area was a big area for us with the channel mix and Q4, but then also we continue to see some really solid supply chain benefits from a costing perspective, and we've talked about that a lot.
Over the last year or so about all the work we've done with consolidating our vendor base SKU rationalization.
And we're seeing that really come through continually hear so excellent excellent work from the supply chain side on that front.
And then we also saw a little bit of benefit in Q4 relative to.
The region mix with the APAC growth being very strong and APAC being kind of our highest gross margin region. So all of those things were really helpful for us and Q4.
And it was obviously a lot better than we had given outlook for on our last call and a lot of that was due to less promotions and discounts than we expected due to the stronger sell through sell in and sell through I think when you think about 2021.
We would expect to be up slightly versus 2020, and thats really going to be the continued supply chain efficiencies mainly around product costing that we've seen a lot and 2020 and that's continuing into 2021.
But then also we would expect to see some improved margins from pricing as we continue to work on pulling back our promotions and discounting primarily and the DTC front as we drive towards that continued premium brand rate growth.
Those benefits and 21, though will be largely offset by the sale of my fitness Pal, which was a really high margin business for us. So if you pull that out that has a pretty dramatic offset on gross margin.
And then the.
Third party off price year over year really isn't much of a factor because we've kind of normalize that now and that 3% to 4% range mix of revenue. So again, it's really to for 2021, it's the supply chain efficiencies with product costing and it's continuing to pull back on promotions and discounting being largely offset by the sale of my fitness.
Coming to our outlook of up slightly year over year.
Thank you best of luck.
Thanks, Paul.
Thank you and our next question comes from John Kernan with Cowen. Your line is now open.
Yeah excellent and thanks for taking my question and congrats on a real nice finish to the year.
Thank you John Thank you John day.
And you said you remain cautious and your outlook and is predicated on a weaker general macro and only moderate improvements in and global retail and just curious.
What we can tell you just to start chasing into a recovery of it.
Once the pandemic starts.
It starts to come to an end and and normal flows and retail.
And to what we can tell you to really chase into a better and.
Fire me to.
At this point of it does feel like there is some momentum on the recovery line.
Yes, I think Theres, a couple of things to think about there.
One is that as I mentioned, we still don't have many orders yet and hand from a timing perspective for Q4 on the wholesale side and Thats, obviously, a very big piece of our business. So we're being a little bit cautious from that perspective.
Second.
Covid is still.
Very front and center and creating challenges around the world. So at this point and so I would say that as we go through the next couple of months and we get more visibility to Q4 orders.
And we get a better feel of whether the vaccination rollout and COVID-19 is getting more and more and check.
And then we'll be in a better place to be able to reassess, but the third thing that I would say is I wouldn't necessarily say the word chase relative to under armour, we've talked about premium brand rate growth and therefore, we are constraining demand a little bit and so there may not be a lot of chasing to do.
And if it's natural orders that are coming in and we're putting the right discipline and constraint against those and that's one thing, but I don't think youre going to see under armour necessarily chasing within the year and and it might just be the term you used John so I'm not trying to pick on that but I just want to be.
Incentive to our strategy and our approach this year and I think it's important Jon to to maybe give a little bit more color around what we mean, when we say constrained demand as it relates to and ability to chase in general as it relates to all quarters of the year as we think about our demand planning functionality and and.
We are tightening.
To bias.
The initial buys at the outer replenishment at the at once capability and all of those buckets, we will be tightening up at <unk>.
<unk> to make sure that we are managing our inventory appropriately, but also to be helping us drive and the brand and to a more premium positioning so there won't be.
Our situation, even if it opens up where we will go and chase apart from the inventories that we have and that.
It's a really important strategy for us going forward.
Got it that's helpful. Clearly, we can all see the improvements and full price sell through which is great.
Okay and you also mentioned.
Footwear being pressured by team sports I think everyone understands under armour has the big.
Asian, and Middle School High School and collegiate sports and just curious if you can.
Could help us quantify what the hit from team sports overall.
Wasn't general for for 2020, and maybe what the recovery and team sports looks likes it and 2021.
Well, maybe I'll lead and and as John first of all I want to say that it's been a horrific year for many of our young people out there and we certainly are incredibly empathetic with all of our team sports athletes and what they've had to go through and also of individual athletes right as it relates to the Olympics and.
And the other events when we look at this year, that's actually one area, where we are enthusiastic in terms of two things one of our innovation pipeline and we're going to be coming out with some awesome <unk> product for both baseball and football and soccer here and this year that we're really really excited about and so that's a big.
Deal for Us and we believe that there's going to be let's say a back to school team sport.
<unk>.
And that is a very positive thing, we think and the back half of the year, Dave do you want to give a little color to yes, I think the only other thing I would add is that the teams for business was also one that was.
Pretty heavily impacted in Q4 of 'twenty with the timing shifts we talked about from Q4 'twenty into Q1 of 'twenty. One so I think just keeping that in mind as well when we think about 'twenty one versus 'twenty.
Got it thank you.
Thank you and next question comes from Randy <unk> with Jefferies. Your line is now open.
Yes, Thanks, a lot of Dave I, just wanted to first clarify on the.
Annual revenue guide for 2021 based on the guidance you gave for the first quarter. It seems like it's implying almost a flattish.
Back half of the year and I think it sounds like Youre, saying youre trying to be conservative or be cautious given the.
And the order patterns.
Darted effectively yet for the back half.
But can you kind of give some sense of where the inventory levels are with your various wholesale accounts.
To me that they seem to be very very lean and so if there is an event, where the consumer feels a little bit stronger and your products starting to resonate a little bit better.
The inventory kind of compare with these accounts for the back half of it.
It is pretty.
I guess easier compelling such that you could pricey.
Some growth there. So just curious on how you think about that.
Yeah, Randy I mean, what youre pointing out is fair.
Within our wholesale partners, we are and a little bit of of lean spot from inventory levels. As we went into 'twenty. One and you are right that that could increase and that could actually give us a little bit of momentum. When we think about Q1 and Q2, but when you think about Q3 Q4 to your point.
I do want to remind us that a lot of the headwinds that we've talked about relative to driving premium brand rate growth a lot of those have a heavier impact on the back half of some of them or full year like when you think about my fitness Pal and not being in the numbers for 2021, that's of full year impact, but when we think about the demand constraint work that's of <unk>.
More back half as well, especially when you think about exiting the undifferentiated retail and North America that.
And that is clearly a back half impact not really of front half impact.
And then even the business model changes and Latin America, although they're not significant in size.
Moving out of some of those countries into distributor model is going to happen as we move through the year and therefore, you'll get a more full impact of that on revenue and the back half of this year and we're moving towards.
Really getting to a point and Latin America, where Mexico is the only remaining kind of full subsidiary business versus the other countries being more of a distributor model. So again that will have some pressure in the back half, but should help improve margins and then to your point again.
We probably are being a little bit prudent and cautious here, especially with Q for planning because we don't have visibility of the order bank yet.
And then we're still keeping an eye on COVID-19 implications. So I think we're being prudent and how were planning and.
And making sure that we're not getting ahead of ourselves and in spending because we think revenue might be different right. Now. This is this is what we feel good with.
And I think that's very fair and again the theme of discipline and clearly coming through with your words and also of the.
More importantly, the numbers and the quarter. So on that can you talk a little bit maybe quantify a little bit more for us and some specific examples where you've worked on SKU count reduction.
Across the board it sounds like it's having a positive effect can you just maybe give us a little bit more quantification on maybe a category of quanta to give.
Example of changes and product sell through how is it now versus last year, just because of these changes and SKU count reduction.
And helpful to us to frame out the actual productivity improvements youre starting to see within the inventory assortment.
Yes, and it's Patrick I'll start and I'll hand, it over to Dave I, just wanted to give a little bit more color on the history, because I think that's important to bear in mind, we started our SKU reduction journey three four years ago, and we never allowed it to to come back or blow back up.
Having said that there are certain areas that we are investing a little bit more heavily into things like run around category. Our footwear category. Our womens category. Those are those are areas, where we are being a little bit more liberal with with increasing skus, but we're not doing it without the expectation.
Productivity.
And I feel that our the way that we think about our Skus now building through the year.
Is the right mix between initiatives that drive brand.
And initiatives as it relates to product that drive volume and.
And ultimately also margin so I think we're well balanced right now as we go into 2021 I expect it to continue to evolve as we go into 'twenty, two and beyond and in certain areas.
But the balance right now for 'twenty. One is right I don't know if you want to add something to your day one.
And thank you covered it pretty well Patrick I don't think at this point, we're going to get into really quantifying will probably be more of a point to quantify as we come to the next call.
Got it and last quick one is and our.
And research, we're starting to see an inflection and.
In terms of looking at athletic.
Dialing from SaaS and more towards performance.
And and you guys have always talked about.
<unk> of staying disciplined and who your customer is of focused performer.
Can you comment on any of that you see that and you're in your in the industry that there's a glib at move.
More of a move towards performance tiling versus.
Cash and styling just curious on your thoughts there thanks guys.
Yes.
And this journey again and has been consistent at spend based on not just ours, but also science with a good balance between the two.
And I think and during the Covid time, what we've seen is.
Yes.
And people really starting to use apparel and a different way there is certainly a big and.
And flex of athleisure instead of going on I think of lot of that has been.
Moving over of shifting over from more of their ready to wear kind of.
High Street.
If you like into more comfortable stuff that you just simply we're at home.
But and it's also been a resurgence and in terms of of fitness at personal fitness and general wellness that is certainly driving.
Innovation, it's driving and aptitude for for performance in the government and as you think about under armour.
And that's the whole point, right, where and authentic athletic performance brand and our mission is to make you better. We're building performance solutions you didn't know that you needed and once you have and can't imagine living without and we're doing that better than anybody else. So if you want to have if you really want to get better and under.
Armour as the brand for you and I think Thats, what youre starting to see now is people are willing to invest a little bit more to get the right product to help them on that journey and that's our job here at under armour job number one and we will continue to believe that that is the right direction for us going forward and.
And I believe to consumer is now going there more often than before.
I think Randy.
So maybe just pointed out to us.
As excited as we are about driving with our DNA and the performance aspect of our product. We also need to make sure that it's always beautiful product and that's something I think we're doing better and better as well and we're excited about the consumer reaction from that front also.
Thank you.
Thank you. Our next question comes from Tom <unk> with Wells Fargo. Your line is now open.
Hey, good morning, everyone and thanks for taking my question.
I wanted to ask about the.
Exit of the North America wholesale doors.
And I'm just kind of wondering when you think long term.
Do you think of any of those sales get recaptured and any of you on the channels. So do you think gets in.
BTC channel or in strategic wholesale.
I guess just kind of thinking.
You may come to the end of lost revenue.
Sure.
Yes, Hi, Tom This is Patrick.
The way that we think about.
Our distribution model and our.
Our omni channel approach to life is really through the eyes of the consumer so.
The way that under armour drives our decisions around where we should be when we should be there how much we should have.
It really is around the consumer journey, ultimately end and I think.
When we see an opportunity to refine our model in terms of of where we should be investing.
We will do so and that's also one of the reasons why direct to consumer it's important for us and it's because of the consumer expects at seamless omni channel opportunity and we as a brand also want to make sure that when we have an opportunity to connect with the consumer we show up at the best possible way to engage to consumer.
And <unk> to drive consideration to drive conversion.
And the decisions that we make are based on that so to answer your question around growth our growth and our future comes and what the consumer so ultimately the waste that we're figuring out how to do that.
Is that part of the journey and we don't believe that undifferentiated retail necessarily is going to help us get there. So it is about having that direct conversation with the consumer more frequently and.
And in a better way and truly understanding what they are expecting us to deliver and if we do it at well we'll continue to make progress.
Understood, Thanks, Patrick and David if I could.
And as Scott and his balance sheet question for you and I think you never.
Never had as much cash.
You have right now I think even net of the $1 billion of debt.
And your net cash position and I think you're biased.
And the company has ever seen.
How do you think about it.
And using that cash or.
Do you think about sitting at for a rainy day or paying down the debt to a job on the balance sheet and cut it off.
Okay.
And you think about that.
Sure.
At this point right now where.
And just very happy to be at an extremely liquid position.
And have an excellent foundation to be able to drive through 'twenty, one and beyond and be nimble through any.
<unk> impacts of Covid, So I would say until we get further past COVID-19, we're very content with just staying very very liquid right now.
As we get further into the future, we could consider some debt buyback or some other things, but in general right now it's not burning a hole in our pocket by any means I will tell you that.
And we're comfortable staying very liquid and very nimble.
And having some optionality as well.
Makes sense, thanks, guys and best of luck.
Thanks, Tom and thank you.
Thank you. Our next question comes from Simon <unk> with BMO capital markets. Your line is now open.
Thanks, Good morning, everyone and really congrats on the ongoing progress.
Patrick as you continue to elevate the brand could you speak to how youre thinking about the AUR opportunity from here and then gauge at any color you can provide at the expectations for the place at debt sorry, the pricing and supply chain benefits in 'twenty, what any way to give some order of magnitude for the gross margin opportunity there for next year and beyond.
Yep sure of highest yes. So when you when you think about the AUR opportunity for under armour at comes in.
And a couple of different areas.
One of course is putting the right amount of product and the right place with the right aesthetic as Dave said and ride performance.
But it's also through inventory management as it relates to.
All of our different channels of distribution and ensuring that we're not driving excess making sure that we are marketing it and the right way and <unk>.
Ultimately, making sure that we're innovating and the right way.
To excite the consumer so for us it's a holistic approach to driving those AUR is up and what we've seen as we've talked about on this call and the back half of 2020 that is the thing that we're starting to see that we're very excited about what's exciting to US is the fact that it is happening across.
And so it's not just in one place we're seeing the rise of Aur's across the business and I think that is a sign of the brands starting to return to health now it's a journey it's at <unk>.
Debt by step process.
And we will continue to make progress this year and and into next year and we're very excited about.
<unk> reads.
As we think about what this could make the brand do and.
Future seasons as it relates to both to margin and brand premium. So I don't know if you want to add something to a day, but yes, I mean I guess just following up on your second part of your question on gross margin.
The supply chain benefits is something that we're we've been.
And seeing which has been great and we're continuing to see that and I would say that on the supply chain front you are probably in 2021 and.
And we'll give an exact number but it's more than 50 basis points of improvement and probably less than a 100 basis points of improvement. So it's in that that range.
But remember that's going to be significantly offset by the MFP sale, which is of very large impact year over year and gross margin.
Percentage points, when you think about 'twenty, two and beyond we're not ready to get into a lot of detail there, but we do expect to see some continued product costing improvements, but youre going to start to normalize that cost base for the supply chain fairly soon so that benefit will start to get smaller as we think about 'twenty two and beyond.
And then from a per.
Pricing perspective.
<unk>.
And definitely a decent benefit there as well, it's probably in a similar range to what we're anticipating on the supply chain benefits side, so hopefully that triangulate to little bit for you.
Great Yeah. Thanks, a lot really nice job guys and best of luck for the year.
Thank you. Thank you and our next question comes from Omar Saad with Evercore. Your line is now open.
Good morning, Thanks for all the information guys one.
To ask a follow up question around the north.
America core apparel core apparel business, you guys mentioned on the womens side bras and bottoms, maybe dive into what's going on and the women's apparel business, a little bit more of anything happening on the mens side to work getting excited about and then I have a quick follow up on Asia Pac and China.
Thanks.
Yes, Hi, this is Patrick.
What we're excited about and apparel and men's is at.
And the continued success that we're having.
Of course with some of our collaborations like project rock, which is continues to work really well for us and.
Every launch we do there is a moment and.
And it continues to do really well, but we're also continuing to expand both our heat gear and a cold gear product with new innovation and.
And our rush product has now started to really become a staple.
Which has helped US segment of our business and also to expand it into a broader offering which we're very excited about.
And Theres a lot of technology that goes into also some of the.
Some of the bottoms for men and that we're going to continue to see being launched here in 2021.
And so theres a lot of.
Things happening and the first half as it relates to that and the second half and the Colgate category and the outerwear category and we're also going to see.
Lot of newness and the brand and.
And a lot of new innovation. So there's just a tremendous amount of core product for men that continues to evolve and resonate with the consumer and that's what we've seen in the back half of the year, we tend to talk a lot about women's right now because we're excited about the progress that we've made there, especially as it relates to our meridian line of our Infinity bra. So both.
I would say across our bottoms at our tops for womens.
And it's really.
A very positive story for us and we believe that's going to continue.
And in 2021.
And then of course.
In terms of our footwear, our new cushioning platform UA flow that was launched with their create.
Recently, and which is doing really well and now comes into play and running and that's going to give US also much more optionality in terms of continuing to build on on the top of the pyramid, if you like and and really gives us optionality in terms of segmentation and broadening our appeal to the core runner. So.
Lot of excitement for 2021 and product in general.
Got it Patrick Thanks, that's helpful and then quickly on China, and Asia Pac and obviously, it's a strong performing market can you help us disaggregate, what's COVID-19 recovery related to the fact that.
At the Lockdowns and there haven't been of severe versus kind of the underlying brand strength can you disaggregate those dynamics and.
Again, and kind of remind us where you are in China, and where you want to be.
Yes, I mean, I think you probably need to break it down a little bit between front half and back half for 2020 rate front half was significantly impacted by Covid.
Very quickly and Q1, and then still pretty Holistically, and Q2, and those quarters were down to 34% and 20% respectively and.
And then as the region and start to get a little bit past Covid. The brand strength continue to pull the business back up and we saw a lot better trending in Q3, and Q4 and as we look forward here into 2021.
We feel good about the partnerships, we feel good about the door expansion plan.
And that we're driving through and we're also kind of rebuilding the.
APAC due to the Covid impacts from the front half of 2020. So I think we're in a good spot we're continuing to drive for with the plan to plan Hasnt significantly changed.
But we definitely hit some holes and Q1 and Q2 of 'twenty relative to Covid.
Got it thanks, guys best of wishes.
Thank you.
Thank you.
Last question comes from Bob Cantwell at Guggenheim Securities. Your line is now open.
Hey, guys.
And I asked the question I have congratulations great great progress.
Can you just spend a little time on on the supply chain and I guess, both what youre seeing as you bring product in and some of the issues or challenges, but also where you are internally, especially around the digital business and how you see that playing throughout this year and that would be helpful. Thanks.
Yes, Hi, Bob It's Patrick I think it has to start with the supply chain.
It's one of other things that we called out as well in terms of how we are now able to navigate the most difficult circumstances because of the tightness that we have and our supply chain and the ability we have for optionality there.
We did an incredible job and the team did a fantastic job and 2020 to at quickly and.
Come to terms with the situation of Covid, 19, and and really from an operations perspective as it relates to all of our vendors work very tightly with our vendors to ensure that they survived but also to navigate the transportation issues that became quite severe throughout the year and.
Now as we turn our attention into 2021, we feel that we are doing a good job again of making sure that we're planning our business to the right way and ultimately supporting that with.
Making sure that we're not getting into trouble as it relates to transportation or inventory position. So.
Feeling confident about our ability to navigate 2021 environment, Dave do you want to add something no I think you covered it pretty well I mean, obviously there is a little bit of pressure there right now with Covid, we're experiencing some port congestion and some container availability challenges, but our supply chain teams are on it and.
They're managing through it very well so we feel good about being able to continue to drive through the year.
Great. Thank you very much.
Thank you Bob Thanks, Bob.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
Moving on.
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